The reporting of long-lived assets in the financial statements is often described as the area that is most dependent on management judgement and estimates. The result is that companies with similar performance in their day-to-day operations may report significantly different profits. Areas affecting financial reporting include:
1. The decision to lease or purchase long-lived assets
2. The decision to use the cost or revaluation model
3. Depreciation of buildings and equipment
4. Determining the impairment of assets
5. Treatment of research and development costs
Instructions
After the class has been divided into groups and you have been assigned one of the five areas listed above, do the following:
(a) Identify where management makes judgements that will affect the reported financial results for your chosen area.
(b) Identify the effect of the judgements you identified in (a) on key financial statement amounts and ratios such as profit margin, asset turnover, and return on assets.